What Is A Purchase Reverse Mortgage?
By way of background, a previous blog on reverse mortgages discusses the general facts regarding reverse mortgages. Let’s talk specifically about the purchase reverse mortgage, which is otherwise known as the Home Equity Conversion Mortgage (HECM) for purchase [H4P]. This product was created by the Housing and Economic Recovery Act of 2008 (HERA). The product is insured by the Federal Housing Administration (FHA) and guaranteed by the US Department of Housing and Urban Development (HUD). In short, the purchase reverse is a way to purchase a home with only a down payment. In addition to the down payment, the buyer is responsible for paying the homeowners insurance, property taxes and (if applicable) Home Owner Association (HOA) fees. There are no principal or interest payments required. However, one may make principal and interest payments by choice not necessity. Finally, if the loan balance on the reverse mortgage eventually exceeds the home’s value, the lender is insured against that loss.
Who Is It Good For?
BORROWER: Age 62 and older based on the youngest titleholder. A non-borrowing spouse under the age of 62 may be added to the loan providing the spouse is over the age of 18. There is no credit required, nor a credit score requirement and only minimal income requirements. This is a minimum documentation loan.
PROPERTY: Single family homes as well as 2-4-unit residential properties and all FHA approved condos are eligible. Title may be held as fee simple, a living trust, and leasehold or life estate. The property must meet FHA appraisal requirements. If the property does not meet FHA criteria (health and safety issues), a set aside account will be established for up to six months while the health and safety requirements of the FHA appraisal criteria are met. The property may be either an existing home or a new build home, so long as the property meets FHA standards.
Examples by Age and Purchase Price of a Home Equity Conversion Mortgage
January 1, 2018 – Pricing is subject to change at any time.
To illustrate – let’s look at the example of a $300,000.00 purchase at age 74: To purchase the residence, the HECM borrower would need $153,088 to close on the purchase of a $300,000.00 property. The balance of the proceeds is provided with the HECM as a benefit of the HECM program and include closing costs. In all examples of HECM purchase mortgages, no mortgage payments are required. All that must be paid out-of-pocket on an annual basis are real estate taxes, homeowners insurance and HOA fees (if applicable). There are no required payments of principal, interest, or other mortgage costs (including upfront costs) until termination of the HECM.
Who Likes Reverse Mortgages The Best? The Borrowers Who Have One!
95% Partially to fully meets my financial needs
93% Positive effect on my life
89% Would refer a friend
94% Report peace of mind
89% Report a more comfortable lifestyle
87% Report a better quality of life
Source: AARP December 2007. Survey of 1500 HECM Borrowers
Why The H4P Can Be Good
A reverse mortgage for purchase allows older Americans to buy a house that better suits their needs without dumping all their retirement assets into it, which would be the case in an all-cash transaction. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage. It provides more purchasing power and doesn’t drain all of the assets. It allows a buyer the luxury to get a better lot, to add all the upgrades they want and to still have no mortgage payment.
The home is titled in the owner’s home; as with all mortgages, the lender retains a security interest in the title. There are no monthly mortgage payments. Instead, the loan is repaid when the home is sold or the borrower no longer resides in the home. The repayment to the lender includes the amount borrowed, plus accumulated interest. Any remaining equity belongs to the borrower, heirs or estate. The heirs may purchase the property for the balance due or 95% of the value, whichever is less.
TIPS: There are no concessions allowed by sellers, builders or agents; this includes any personal property. As well, the buyer must pay for the title insurance. There can be no repair set-asides; all repairs, where major property deficiencies, such as
- No running water
- Leaking roof
- No primary heating source
- Inadequate electrical system (including lighting)
- Inoperable doors and windows (inhibited ingress and egress)
- State or local code violations
which threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property, must be completed by the seller prior to closing. (H4P FAQs per HUD).
NOTICE: (1) Rates are subject to change without notice. For specific and current information contact me or your H4P Specialist. (2) The illustrations in the above chart titled: *Examples by Buyers Age and Purchase Price, are representative examples only. The figures are not intended to be anything other than representative illustrations in order to convey the concept of the purchase reverse mortgage.
DISCLOSURE: The information provided herein is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.
DISCLAIMER: This post does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.
Financially Speaking™ James Spray, RMLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365| First Published 01/11/10 | Updated January 1, 2018
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.